Corporations reorganize and restructure for various reasons and in numerous ways. The bottom line usually is, well, the bottom line. Companies reorganize to increase profits and improve efficiency. The reorganization of a company typically addresses the efficiency component in an attempt to increase profits. It’s not unusual for a corporation to reorganize on the heels of changes at the top. A new CEO often sees reorganization as a cure for a company’s ills, and companies sometimes hire a new leader based specifically on his vision for reorganization.

Possible Reorganization Reasons

Corporate reorganization normally occurs following new acquisitions, buyouts, takeovers, other forms of new ownership or the threat or filing of bankruptcy, according to the Thinking Managers website. The VC Experts website reports that reorganizations involve major changes in a corporation’s equity base, such as converting outstanding shares to common stock or a reverse split – combining a company’s outstanding shares into fewer shares. Reorganizations often occur when companies already have attempted new venture financing but failed to increase company value.

Type A: Mergers and Consolidations

Section 368 of the IRS Revenue Code identifies seven types of corporate reorganizations. As reported by Tax Almanac, the first recognized reorganization type is a statutory merger or acquisition. Mergers and consolidations are both based on the acquisition of a corporation’s assets by another company, according to the firm Greenstein, Rogoff, Olsen & Co., LLP.

Type B: Acquisition – Target Corporation Subsidiary

A Type B reorganization is the acquisition of one company’s stock by another corporation, with the acquired company becoming a subsidiary of the acquiring corporation. The acquisition plan must be carried out in a short time period, such as 12 months, and the acquisition has to be only one in a series of moves comprising a larger plan to acquire control. The transaction also must be made solely for the purpose of acquiring voting stock.

Type C: Acquisition – Target Corporation Liquidation

Unless the IRS waives the requirement, a targeted corporation must liquidate as a condition of a Type C acquisition plan, and target-corporation shareholders become shareholders in the acquiring company. Reorganization provisions dictate tax consequences, not liquidation rules contained in Tax Code Sections 336 and 337.

Type D: Transfers, Spinoffs and Split-Offs

Type D transfers are classified as acquisitive D reorganizations or divisive D restructurings, which include spinoffs and split-offs. For example, if Corporation A contains the assets of former Corporation B and of Corporation A, Corporation B goes out of business, and former Corporation B shareholders control Corporation A.

Type E: Recapitalization and Reconfiguration

A recapitalization transaction involves the exchange of stocks and securities for new stocks, securities or both by a corporation's shareholders. The move concerns just one company and the reconfiguration of the company’s capital structure. Possible scenarios include a stock-for-stock recapitalization plan, a bonds-for-bonds move and a stocks-for-bonds transaction.

Type F: Identity Change

A Type F reorganization plan is defined in the Internal Revenue Code as "a mere change in identity, form or place of organization of one corporation, however (a)ffected." F reorganization rules generally apply to a corporation that changes its name, the state where it does business or if it makes changes in the company’s corporate charter, in which case a transfer is deemed to occur from the prior corporation to the new company.

Type G: Transfer of Assets

Type G reorganizations involve bankruptcy by permitting the transfer of all or some of a failing company’s assets to a new corporation. One caveat is that the stock and securities of the controlled corporation are distributed to the previous company’s shareholders under Type D – transfer reorganizations – rules for distribution.

About the Author

John Kibilko has been writing professionally since 1979. He landed his first professional job with "The Dearborn Press" while still in college. He has since worked as a journalist for several Wayne County newspapers and in corporate communications. He has covered politics, health care, automotive news and police and sports beats. Kibilko earned a Bachelor of Arts in journalism from Wayne State University.